Question

An investor is considering purchasing a bond with a 4.28 percent coupon interest? rate, a par value of? $1,000?, and a market price of? $673.71

The bond will mature in nine years. Based on this? information, answer the following? questions:

a. What is the? bond's current? yield?

b. What is the? bond's approximate yield to? maturity?

c. What is the? bond's yield to maturity using a financial? calculator?

?Note: Assume coupon payments are paid annually

Answer 1

Answer a.

Par Value = $1,000
Current Price = $673.71
Annual Coupon = 4.28% * $1,000
Annual Coupon = $42.80

Current Yield = Annual Coupon / Current Price
Current Yield = $42.80 / $673.71
Current Yield = 6.35%

Answer b.

Par Value = $1,000
Current Price = $673.71
Annual Coupon = $42.80
Period = 9 years

Approx Semiannual YTM = [Annual Coupon + (Par Value - Current Price) / Period] / [Par Value + Current Price]
Approx Semiannual YTM = [$42.80 + ($1,000 - $673.71) / 9] / [$1,000 + $673.71]
Approx Semiannual YTM = 79.0544 / 1,673.71
Approx Semiannual YTM = 4.72%

Approx Annual YTM = 2 * 4.72%
Approx Annual YTM = 9.44%

Answer c.

Par Value = $1,000
Current Price = $673.71
Annual Coupon = $42.80
Period = 9 years

Using financial calculator:
N = 9
PV = -673.71
PMT = 42.80
FV = 1000

I/Y = 9.93%

So, yield to maturity is 9.93%